Process costing

Process costing is adopted when there is mass production through a sequence of several processes Example include chemical, flour and glass manufacturing It computes the average cost per unit by dividing the costs or production for a particular period by the number of units produced during the period

Direct material Direct labour overheads

Process 1

Direct material Direct labour overheads

Process 2

Direct material Direct labour overheads

Process 3

Finished goods

Cost of goods sold

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Accounting for Process Costing

Costs are accumulated by each process Each process maintains its process account The process account is debited with the costs incurred and credited with goods completed and transferred to other process account When the goods are completed, they will be transferred to finished goods account When the goods are sold, the amount will be transferred to the cost of goods sold account
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Process A

Process B

Material 500 Process B Labour 100 Overhead200 800

800

800

Process A800 Process C Material 50 Labour 150 Overhead100

1100

1100

1100

Process C

Finished Goods

Process B 1100 Finished Gds 1500 Material 80 Labour 110 Overhead 210 1500 1500

Process C 1500 Cost of GDs Sold 1300 Bal c/d 200 1500 1500
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Accounting for losses and scrap in process account

Accounting for losses in process costing

In a production process, losses are inherent and unavoidable Nature of losses
Normal loss Abnormal loss

Accounting for scrap

Damaged goods may be sold as scrap Revenue arising from the scrap should be treated as a reduction in cost rather than an increase in sales revenue

Transactions
Normal loss

Accounting treatment

Accounting entries
No entry

Losses within expected level Not assigned cost Abnormal loss Excess loss over the expected level Assigned cost

Dr. Abnormal loss Cr. Process account Abnormal gain Gain resulted when Dr. Process the actual loss is account less than the Cr. Abnormal normal or gain 10 expected loss

Transactions

Accounting treatment

Accounting entries
Dr. Scrap Cr. Process account Dr. Scrap Cr. Abnormal loss Dr. Abnormal gain Cr. Scrap
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Scrap value of Reducing material normal loss cost Scrap value of Reduce cost of abnormal loss abnormal loss Loss of scrap The actual units value due to sold as scrap will abnormal gain be less than the scrap value of normal loss

Transactions

Accounting treatment

Accounting entries
Dr. Cash Cr. Scrap

Actual cash Reducing material received from cost the sale of scrap

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Example

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Joyce Ltd. operates a factory involving two production Processes. The output of process 1 is transferred to process 2. The information of production for January 2013 is as follows: Cost for Process 1 Materials: 3000 units at $5 per unit Labour $2400 Cost for Process 2 Materials: 2000 unit at $8 per unit Labour $1680 No opening and closing work in progress Output for January 2013 Process 1: 2300 units Process 2 4000 units

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 General overhead, for January 2013 amounted to $7140, are absorbed into the process cost at a rate of 375% of direct labour costs in process 1 and 496.4% of direct labour cost in process 2. The normal output of process 1 and process 2 is 80% and 90% of input respectively Waste matters from process 1 are sold for $4 per unit and those from process 2 for $6 per unit Required: (a) Process 1 (b) Process 2 (c) Scrap (d) Abnormal loss (e) Abnormal gain

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Process 1 account Units $ 3000 15000 Units Scrap: normal loss (4*600) 600 Process 2 ($10*2300) $

Materials ($5 *3000) Labour Overhead (2400*375%)

2400

2400 9000

2300 23000 100 1000

Abnormal loss ($10 *100)

3000 264000

3000 26400

Cost per unit = Total expected cost Total expected output = $26400-$2400 3000-600 = $10 per unit
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Process 2 account
Units Process 1 2300 23000 $ Scrap: normal loss ($6*430) 430 Units 2580 $

Materials
Labour Overhead (1680*469.4%)

2000 16000
1680 8340

Finished goods ($12*4000) 4000 48000

4300 49020 Abnormal gain ($12 *130) 130 1560 4430 50580 4430 50580

Cost per unit = = $49020-$2580 4300-430 = $12 per unit

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Abnormal loss account

Units
Process 1 100 1000 100

$
Scrap Profit and loss 1000 100 100

Units
400 600 1000

Abnormal Gain account

Units Scrap: value of abnormal gain

Profit and loss 130 780 780 100

$ Process 2

Units 130 1560

1000

100

1000

Loss on scrap value due to abnormal gain

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Scrap account Units $ 600 2400 Units Abnormal gain (Process 2) (130*$6) Cash process 1 (600+100)*$4 700 $

Normal loss (Process 1) Normal loss (Process 2)

130

780

430

2580 2800

Abnormal loss 100 (Process 1) (100*$4)

400

Cash process 2 (430-130)*$6 300 1800 1130 5380 1130 5380

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Wk 1: Determining the output and loss: Process 1 Input 3000 units Less: normal loss (20%) Expected output 600 units Actual output 2300 units 2400 units

Abnormal loss

100 units

Wk 2: Determining the output and loss: Process 2 Input (2300+2000) 4300 units Less: normal loss (10%) Expected output 430 units Actual output 4000 units 3870 units

Abnormal gain

130 units

Back 1

Back 2

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Equivalent units of production

If there is no opening or closing work in progress (WIP) the unit cost of products can be obtained as follows

Unit Cost = Sum of production costs Production quantity

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 However, If there is opening or closing work in progress, the partly completed production will have a lower cost than the fully completed production We have to converted the work in progress into finished equivalent units of production (EUP)

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 Opening work in progress Started and completed units Closing work in progress

Three categories in determining the equivalent units of production

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Opening work in progress (OWIP)

These units were started in the previous period and are to be completed in the current period

1/3 EUP completed In previous period 2/3 EUP completed in current period
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Started and completed units (SACU)

These units are started and completed in the current period

1 EUP completed in current period

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Closing Work in progress (CWIP)

These units are started in the current period and are to be completed in the coming period

1/3 EUP completed in current period Incomplete part

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Two methods of cost flows in process costing

First in First out Weighted average cost

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First-in-first-out method The opening work in progress is the first group of units to be processed and completed during the current period It separates the cost computations of the opening work in progress and the current period production

Weighted average method The opening work in progress is merged with the production of the current period to form one batch of production The average cost per unit of the opening work in progress and the current period production is the same
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First-in-first-out method The EUP computation ignores the work performed on the opening work in progress during the prior period Cost per unit = Current cost EUP

Weighted average method The EUP computation includes all work performed on the opening work in progress during the prior period Cost per unit = Cost of OWIP + Current Cost
EUP

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FIFO Method

WAVCO Method

10 units of OWIP (60% completed in previous Period) 70 SACU 40 units of CWIP (20% completed)

4 EUP + 70 EUP + 8 EUP

10 units of OWIP (60% completed in previous Period) 70 SACU 40 units of CWIP (20% completed)

10 EUP

+
70 EUP + 8 EUP

82 EUP

88 EUP

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Example

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Lucky Ltd. makes toys in a one-department production process. The following information is available related to the production in February 2013.
Opening work in progress: 1000 units Degree of completion % Direct materials 100 Conversion (labour + overhead) 60

Cost $ 6000 1200 7200

February production: 20000 units

Direct materials Conversion 30000 52200 82200

Closing work in progress: 3000 units (20% as complete as to conversion

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You are required to : Prepare Process 1 account using (a)The FIFO method of valuation; and (b)The weighted average method of valuation

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First in First out

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Wk 1: Number of Equivalent units (EU) Total Units Opening work in progress Other completed units Total completed units Closing work in progress 1000 17000 18000 3000 21000 Materials EU 0 17000 17000 3000 20000 Conversion EU 400 (40%) 17000 17400 600 (20%) 18000

20000-3000
Wk 2: Costs No opening WIP Total $ 82200 4.4 Materials $ 30000 1.5 Conversion $ 52200 2.9
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Costs incurred in the period Costs per equivalent units

Wk 3: Cost of units transferred to finished goods and closing WIP Total Materials $ $ Opening WIP Cost to complete 1000 units completed 17000 units completed Transfer to finished goods Closing WIP 7200 1160 8360 74800 83160 6000 6000 25500 31500

Conversion $
1200

(Wk 4) 1160
2360 49300 (Wk 5) 51660

6240
89400 Wk:4 Conversion: $2.9*400= 1160 Wk 5: Materials: 17000*$1.5 = $25500 Conversion: 17000*$2.9 = $49300 Wk 6: Materials: 3000*$1.5 = $4500 Conversion: 600*$2.9 = $1740

4500
36000

1740 (Wk 6)
53400

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Process account Units $ Opening WIP 1000 7200 Materials Conversion 20000 30000 52200 21000 89400 21000 89400 Units $ Finished goods 18000 83160 Closing WIP 3000 6240

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Weighted average cost method

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Wk 1: Number of Equivalent units (EU) Total Materials Units EU Opening work in progress Other completed units Total completed units Closing work in progress 1000 17000 18000 3000 21000 Conversion EU

1000 1000 17000 17000 18000 18000 3000 600 (20%) 21000 18600

20000-3000
Wk 2: Costs Total Materials $ Conversion $ 6000 30000 52200 53400
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$ 1200

Opening WIP Costs incurred in the period

Costs per equivalent units

7200 82200 89400

36000

4.5853

1.7143

2.8710

Wk 3: Cost of units transferred to finished goods and closing WIP Total Materials $ $ Transfer to finished goods Closing WIP 82535 6865 89400 30587 5143 35730 51678

Conversion $

(Wk 4)

1722 (Wk 5) 53400

Wk 4: Materials: 18000*$1.7143 = $30587 Conversion: 17000*$2.8710 = $51678 Wk 5: Materials: 3000*$1.7143 = $51678 Conversion: 600*$2.8710 = $1722

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Process account Units $ Opening WIP 1000 7200 Materials Conversion 20000 30000 52200 21000 89400 21000 89400 Units $ Finished goods 18000 82535 Closing WIP 3000 6865

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